Making the Most of China’s Massive Healthcare Market

It has always been easy for businesses to lose their way in China. Because of the enormous growth opportunities in the country, many companies have tried to enter China well before they had conducted adequate due diligence or, in some cases, before the market had properly matured. In the midst of China’s breathtaking investment in its medical system, American healthcare operators and device, pharmaceutical, and diagnostic equipment manufacturers are bearing down, eager to take advantage of what may be a once in a generation opportunity to participate in an exponential increase in China’s healthcare capacity. The challenge for companies eager to participate in the country’s massive investment is to understand not only how to access the market, but when.

The numbers driving the interest of American healthcare businesses are indeed staggering. By 2015, China plans to add another 150,000 primary care physicians, build 2,000 new county hospitals, 29,000 new township hospitals, and upgrade another 5,000 clinics and hospitals. These facilities will need to be designed, built, and equipped. It’s no surprise that in 2012 US Ambassador to China Gary Locke focused one of his trade missions on connecting American hospital operators, architects, and builders with Chinese partners. Once up and running, these new healthcare facilities will create new outlets for American medical companies to place their products and services, provided the industry is able to cost-effectively sell into the rapidly expanding domestic Chinese healthcare market.

What is driving the Chinese government’s healthcare investment?

At least three factors explain China’s 2009 healthcare stimulus and the central role healthcare spending plays in the 12th Five-Year Plan (2011-15). First, there is a general consensus among China’s policy makers that one of the major barriers to the goal of developing of a domestic consumer economy is the lack of a social safety net, specifically in the areas of healthcare and pensions. The widely held belief is that if the Chinese government can provide basic healthcare coverage to its people, they will save less of their discretionary income and spend more. Second, the country needs to quickly build a competent and more comprehensive primary and specialty care infrastructure due to the disastrous combination of China’s water and air pollution, an estimated 350 million smokers, and rapid increases in chronic diseases, such as diabetes and cardiovascular problems, largely caused by western diets. Third, major inequities in healthcare persist in China between urban and rural areas, as well as between rich and poor. Lifting the quality of care, and expanding access points for primary care in particular, is expected to go a long way towards tamping down on social unrest related to these disparities.

China is known for its ability to make sweeping infrastructure investments like those currently taking place within its healthcare system. But what good is a new MRI installed in a newly built hospital if the site lacks trained radiologists, surgeons, or therapeutics for follow-up treatment? American companies that want to be successful in China beyond the short-term need to identify hospitals that are institutionally motivated by a solid grasp on the clinical benefit, or improved patient satisfaction, that stems from their product or service being implemented within the hospital system. Finding Chinese hospitals with money to spend will not be difficult over the next five to 10 years. Finding medical professionals who are fully informed on why they need the specific technology an American firm is offering will be more difficult. Given the enormous amount of money floating around the Chinese healthcare market—a total investment estimated to rise from $357 billion in 2012 to $1 trillion by 2020—the decision to be selective about who companies target may seem overly cautious. But as has been seen in several early endeavors in China’s healthcare sector, simply having money and a willingness to spend it on American technology is not enough.

Timing is everything

Before healthcare companies decide they want to focus additional energy on the growing opportunity in China, they first need to determine if the timing is right for their product, service, or technology. Good examples of companies being over-eager to expand into China can be found in the hospital software sector. The industry initially found that China’s hospitals were eager to purchase new software systems to run their hospitals and track patients, but the administrators remained reluctant to spend money on the necessary customization, implementation, and training that made the software systems usable and sustainable. By the late 2000s, many of China’s hospitals could boast they had installed best-in-class management systems, laboratory information systems, electronic medical records, and even Radio Frequency Identification (RFID), but most of these systems’ capabilities went largely misunderstood and too much of it lay idle. Why did this happen?

The answer lies in understanding that what really drove the market was a combination of policy mandates from China’s central government to modernize hospital information technology (IT) systems and Ministry of Health budget allocations that had to be spent on hospital IT rather than a meaningful appraisal of the business practices, efficiency gains, and improved patient outcomes that could be delivered once the software systems were up and running. Soon after the systems were installed, many languished, leaving clients dissatisfied with their initial product experience, and companies unhappy with their first foray into China. The issue for these early entrants in the hospital IT sector was not that the product was unable to meet a need for their Chinese clientele; rather, the American software companies misunderstood what was driving the hospitals’ interest. A more deliberate process would have likely resulted in many fewer software systems being sold; however, those that were sold would have gone into institutions that understood, valued, and were committed to the customization, training, and ongoing maintenance necessary to make a hospital IT system deliver its full value. This sort of short-term discipline is particularly difficult in a market the size of China in the midst of such massive investments.

Evaluate the customer’s motives

The experience of companies selling hospital software systems points towards a key market access lesson for healthcare companies in China: always make sure the motives of a potential Chinese customer are evaluated and understood. In many cases, a Chinese hospital administrator is more concerned with achieving a specific policy goal established by the Ministry of Health, or part of an overarching objective within the 12th Five-Year Plan, than anything related to improvements in clinical outcomes or patient satisfaction. While this disconnect may not always be present, sensitivity to this concern can empower healthcare companies to ask better questions about the motivations of those purchasing their products, and do a better job selecting the right customer. Success in China’s healthcare industry requires a business to constantly think about whether it understands the motives of its customers. This knowledge may limit the size of the market that businesses can initially sell into; but such self-imposed restraint will also go a long way towards protecting a company’s reputation and make longer term success in China much more likely.

Carefully select a good partner

If understanding a Chinese hospital’s motivations is so important, what is the best way to find this information? Certainly, it is critical for healthcare companies expanding in China to have good, healthcare-specific information on the policy mandates, regulations, and reimbursement strategies that drive how and why Chinese hospitals buy. But as is always the case in China, it is important to understand the disconnect between what the central government wants to see done and how local municipalities and individual hospital administrators act on these mandates. Consequently, for American healthcare businesses to understand what is driving the purchasing behavior of a particular site, local connections both within the hospital and local government are essential. Aspects of a hospital’s behavior and culture will only be identified and grasped by the Chinese go-to-market partner selected for a company’s product. In most cases, this will be a distributor whose sales force is actively engaged with the key stakeholders that drive the hospital’s purchasing decisions. Whether the American business is a major multinational or small enterprise, finding a distributor with a solid grasp on what drives successful sales of the product or technology in question and, more importantly, what creates a happy customer in China is essential.

Even the largest foreign multinationals have found that success in China is as much about the distribution partners they select as the products made available for sale. In China, purchasing decisions within hospitals can be difficult to understand. Key opinion leaders within the hospital can be surprisingly difficult to identify and even harder to access. Once they are identified, healthcare companies then face the somewhat daunting challenge of selling their product or service without violating the Foreign Corrupt Practices ACT (FCPA), a difficult issue in China’s hospital system. Years of under-resourced hospitals have led to the widespread practice of individuals paying the now ubiquitous red envelopes to Chinese doctors for their services. Similarly, healthcare companies working to navigate the maze of a Chinese hospital will often encounter unspoken but very real expectations that they either pay for access, or pay for the opportunity to have their product purchased by the hospital. Much of a healthcare company’s ability to successfully navigate a Chinese hospital system resides in the know-how and relationship network derived from their distributor. The process by which a distributor is chosen needs to reflect not only the robustness of the distributor’s ability to access a particular hospital system, but also their ability to comply with US and Chinese laws.

Judging the latter point is as much about culture as it is the distributor’s formal compliance training and auditing capabilities. Distributors that trivialize the difficulties in dealing with compliance matters probably do not understand, and will not follow, the FCPA guidelines that American healthcare firms must follow when selling into China’s hospitals. The right distributor not only offers access to the informal relationship networks that drive purchasing in a hospital system, it also has a track record of working with other international healthcare companies with similar compliance expectations. Most distributors that understand compliance will also have a good sense of what to look for in terms of Chinese hospitals that want to implement new technology and services for the right reasons.

China’s healthcare market is a tantalizing opportunity, but foreign healthcare companies must carefully navigate enormous challenges. The trade-off between high volumes and low margin will be especially acute in China. The need for device and pharmaceutical companies to craft strategies that will allow them to successfully sell to the middle class remains a pressing issue. The Chinese government’s desire to develop a domestic life science industry means companies will have to carefully manage technology transfer issues. Healthcare entrepreneurs who want to build innovative delivery systems will have to guard against the potential for the state to evolve its own competitive models based on the insights these operators prove can work in China.

Even with all of these issues in mind, healthcare businesses that recognize the market for their goods and services in the United States is coming under increasing price pressure with fewer opportunities to drive growth means they must find ways to be successful in new markets like China. This realization should not come at the expense of careful due diligence and a patient, disciplined approach to accessing China’s healthcare market.

[author] Benjamin Shobert ([email protected]) is the founder and managing director of Rubicon Strategy Group. He is based in Seattle, Washington. [/author]